Eastern Europe offers investment opportunity for UK farmers

Investing in overseas agriculture is back in fashion, and it’s not just the big boys who stand to make substantial gains. Robert Harris reports

Over the past few months, increasing numbers of professional investors have been putting some serious sums of money into farming, with eastern Europe and the Former Soviet Union at the top of many lists.

After taking stock following the worst economic downturn in living memory, wealthy individuals, funds, private equity and other trading and investment companies are being tempted by a relatively secure home for their money and the chance to make some very competitive returns.

The buoyant outlook for commodities is a key driver behind this renewed interest, says Carl Atkin, head of research and consultancy at Bidwells Agribusiness.

“Investors are generally subscribing to the view that a structural shift in global commodity prices over the next decade will drive enhanced returns from farmland and farming operations.

“Farmland is attractive because it is a useful inflation hedge, with little correlation to other asset classes. And, in some areas of eastern Europe and the Former Soviet Union, farmland looks undervalued, offering the chance of good capital gains for those prepared to wait.

“At the same time, these areas can also offer much better returns from farming operations than we are used to in the UK.”

Smaller investors, including individual farmers or joint ventures, should take note, he believes. “There are certainly opportunities out there, and there is no reason that individual farmers shouldn’t succeed, provided they do the homework.”

While FSU countries including Russia and the Ukraine may look tempting, with parts boasting some of the best soils in the world, the complexity probably means they are largely off limits to many smaller investors who tend to stay within the EU.

“Land is underused, and there is potential to bring it into arable production and to raise yields across the board. The region has good access to export facilities, and fixed costs are about half those of the UK,” says Mr Atkin.

However, ownership of farmland is currently forbidden in the Ukraine, and leasing it can be complicated. “A farming company of 100,000ha may have 20,000 individual lease agreements,” he notes.

Investors in Russia can get hold of freehold land title, but it is an even more drawn-out process as land assets were divided into hundreds of small virtual land shares following the privatisation of collective farms.

As such, the FSU is probably best suited to large-scale investors with the time, money, staff and expertise to make a good return on farming operations, he believes. “It is all about industrial-scale operations, and the rewards for getting it right can be good, with 10-15% operational returns perfectly feasible.”

Compared to the UK, good operating returns can be had in eastern European countries, typically 5-7% in the 2004 EU accession countries like Poland, Hungary and the Czech Republic.

Being within the EU, these are less risky investments legally and economically, and, with full land ownership rights available for foreigners in most countries this also offers the chance for capital growth.

There is keen interest in all of these countries which are suited to large-scale arable production, says Mr Atkin.

“However, land values in parts of these countries have risen to anything from €5000/ha to €7000/ha and beyond, approaching those in parts of eastern Germany, so the prospects for capital growth have reduced.”

Prices in 2007 accession countries like Romania are lower, so they offer a much better potential uplift. Romania is suited to the smaller investor as well as larger agribusiness, says Mr Atkin, with significant areas of land still not farmed.

Similar returns are available in Bulgaria, although doing business is less straightforward there, Mr Atkin believes.

“Romania looks a particularly good candidate – it has excellent soils, with good black earth running up the eastern side, ideal for arable production, and flexible soils around the Danube suited to root crops and field-scale vegetables.”

There are two opportunities to make good returns, he explains. “The first is to aggregate parcels of land – ownership is fragmented, with strips of land resembling England 400 years ago.”

Simply parcelling land in this manner will raise land prices from about €1000-1500/ha to €3500/ha, he explains. “Registering ownership of land is very bureaucratic, but you need to ensure you do everything by the book. People who come unstuck usually do so because they tried to take a shortcut.”

Landowners can also take advantage of generous grant aid to establish and improve farm infrastructures such as grain storage, reservoirs and irrigation systems, he explains.

“In eastern Europe, Pillar 2 funding is geared at improving the infrastructure of farm holdings, rather than the environmental focus seen in western Europe. There are some very useful payments to be had.”

The second opportunity to make good returns comes from actually farming the land, once sufficient critical mass has been amassed through ownership where possible, and leasing if necessary to fill in the gaps.

“Leasing is relatively simple, so you can get to a large scale and achieve good returns quite quickly. But you need to tightly control the area, or you can end up with bits of land all over the place. You need to get to know local, reputable people to help the process run smoothly.

“Do it right, and operating returns of 7-9% are achievable on in-hand land,” says Mr Atkin.

“Add in capital appreciation of land of 12-15% per annum and you are looking at potential annual aggregated returns of up to 19-24% per annum over a five or 10-year period,” he concludes.